BRICS bank to reshape international finance

BY Matt Atkins

Tuesday 16 July saw the leaders of the BRICS nations launch a $100bn development bank and currency reserve pool aimed at funding development projects in emerging nations. The move has been heralded as the first concrete step toward reshaping a Western-dominated international financial system, symbolised by the IMF and World Bank.

Based in Shanghai, the bank will be led by India for the first five years, followed by Brazil and then Russia. The new bank reflects the growing influence of the BRICS, which account for almost half the world's population and approximately one-fifth of global economic output.

The bank will begin with a subscribed capital of $50bn divided equally between its five founders (Brazil, Russia, India, China and South Africa), with an initial total of $10bn in cash put in over seven years and $40bn in guarantees. It is scheduled to start lending in 2016 and be open to membership by other countries, but the capital share of the BRICS cannot drop below 55 percent.

The contingency currency pool will be held in the reserves of each BRICS country and can be shifted to another member to cushion balance-of-payments difficulties. China will contribute the bulk of the contingency currency pool, at $41bn. Brazil, India and Russia will put in $18bn each and South Africa $5bn.

Negotiations to create the bank lasted two years as Brazil and India fought China’s attempts to get a bigger share in the lender than the others.

Negotiations over the headquarters and first presidency lasted until Monday 15 July due to further differences between India and China. These difficulties reflect the issues Brazil, Russia, India, China and South Africa have faced in reconciling their economic and political differences.

While Brazil and India have prevailed in keeping equal equity at the bank’s launch, there are still some fears that China, as the world's second largest economy, could try to assert greater influence over the bank to expand its political influence.

News: BRICS set up bank to counter Western hold on global finances

UK to tighten foreign takeover rules

BY Matt Atkins

UK Business Secretary Vince Cable has announced his intentions to tighten rules dealing with the foreign takeover of UK firms. The news comes after controversy which surrounded the failed takeover bid for British-based AstraZeneca, by US drugs giant Pfizer.

Speaking to the BBC, Mr Cable said foreign firms must be given no opportunity to shirk their responsibilities to UK workers and business interests. Foreign firms reneging on any promises made during a deal should be subject to financial penalties, under any new regime governing takeovers.

The enforcement of any new regime would also require legislative change, said Mr Cable, and he revealed broad agreement across the government for such measures.

Tighter laws to strengthen the 'national interest test' could also be in the pipeline, after concerns about the acquisition of major UK firms. As a 'last resort', the government needed to be able to intervene in dealmaking if transactions do not appear in the public interest. Currently, a formal public interest test only allows ministers to intervene when financial stability or media plurality are threatened.

Pfizer’s bid for AstraZeneca, raised concerns of job cuts as well as the loss of vital research and development carried out at the UK company. "What the government did then was to engage in negotiations to seek assurances. Where we now have to strengthen that is to make sure that where commitments are made, there is no wiggle room," Mr Cable told the BBC's Andrew Marr.

Pfizer gave a five-year commitment to complete AstraZeneca's new research centre in Cambridge, retain a factory in northern England and put a fifth of its research staff in Britain, but stipulated these pledges could be dropped if circumstances changed "significantly". To ensure in future that such assurances would be binding, Mr Cable said "we may well get into the area of having financial penalties" as a means of ensuring that companies stood by their takeover promises.

Such guarantees would prevent a repeat of a situation in 2010, which saw US foods group Kraft make a successful bid for British rival Cadbury with a promise to keep one of Cadbury's factories open. Kraft went back on this pledge shortly after the deal was completed.

News: Britain plans to remove 'wiggle room' in foreign takeover rules - minister

France wins EU merger law approval

BY Richard Summerfield  

The French government has won the approval of the EU for a controversial new law which grants the government more power to block takeovers of French companies in strategic industries.

The decision, announced by French economy minister Arnaud Montebourg, was based around the government’s move to extend its control over mergers and acquisitions in industries which have been deemed key to France's national interests. The new law was inspired predominantly by the deal that saw General Electric Co (GE) successfully acquire the energy assets of French group Alstom.

“The European Commission in recent days notified the French government of its approval of the decree as perfectly in line with European treaties,” said Mr Montebourg in a conference speech in France. “It was used in the GE-Alstom case. It will be used again in certain sensitive sectors such as water, health, national defence, gaming, transport, energy and telecommunications" he added.

Although the European Commission, the EU’s executive body, has approved the law, it is not willing to provide the French government with carte blanche to veto deals in the future. Indeed, the Commission has announced that it intends to closely monitor the situation in the months ahead. A spokeswoman for Europe’s financial services chief Michel Barnier wrote "We recall restrictions on free movement of capital can be justified if the objective pursued is one of public policy and public security. Any action taken to restrict free movement needs to be proportionate and serve the public interest. We will closely monitor any use of the law, i.e. systematically monitor any application of the investment screening legislation, and check in particular that it is not used to achieve purely economic objectives."

Following a protracted negotiation period, GE’s takeover of Alstom was finally approved at the end of June. The company was forced to overcome a number of hurdles in order to finally get the deal ratified. Most notably, the $17bn takeover of Alstom’s energy assets was only approved after one of Alstom’s existing shareholders, Bouygues, agreed to sell a stake in the firm to the French government. As per the government’s terms, Bouygues will be required to sell as much as 20 percent of Alstom to the state. GE beat out competition from Siemens AG and Mitsubishi Heavy Industries, which tabled a rival bid for Alstom’s assets.

News: France says won EU backing on takeovers law, EU says will monitor

Assessing MiFID’s facelift

MiFID I was largely successful in matching its original ambitions of moving towards a single European market in financial services, and removing the monopoly of regulated markets. However, the Directive fell down in a number of areas. Given the extended scope of products and activities covered by MiFID II, it is expected to have a significant impact on the European market in the years ahead.

FW moderates a discussion on MiFID II between Michael Thomas at Hogan Lovells, Kara Cauter at KPMG and Marius Floca at RBS.

TalkingPoint: Analysis of MiFID II

Cyber risks still overlooked in dealmaking

Cybersecurity is now one of the most pressing concerns among the spectrum of risks arising in the M&A process. Intellectual property, operational efficiency, and financial controls are all at stake when companies embark upon a transaction without properly managing this risk. Recent large-scale attacks and the notoriety they have gained may be increasing awareness of these issues, but understanding how best to address them requires expertise that may be lacking among dealmakers.

FW moderates a discussion on cyber-security risks in M&A between Adam Pang at Merrill DataSite, David Stanton at Pillsbury Winthrop Shaw Pittman LLP and Timothy J. Nagle at Reed Smith LLP.

TalkingPoint: Managing cyber-security risks in M&A